Select Committee on Work and Pensions Fourth Report



The Government has proposed significant reform to the UK pension system in its recent White Paper Security in retirement: towards a new pensions system. This report sets out the Committee's detailed response to the proposals.

We conclude that on the whole the Government's measures are the right way forward. They do not represent the wholesale simplification some were seeking, but they have other advantages and appear to be feasible. They form a sound basis for a political consensus. Other stakeholders - including businesses and unions - are broadly signed up to these measures, recognising the trade offs but viewing them as a significant improvement on the present system. It is essential to rebuild trust in pensions, and we are hopeful that these proposals will begin to do that.

The new system has a number of different elements with the most ambitious being the Government's plan to introduce a new system of personal accounts for pension saving. Employees who are not in an occupational scheme will be opted-in, unless they make an express decision otherwise. The Government has not yet decided who will run the scheme, but it has stressed that charges should be kept low to maximise the pension pot savers can anticipate when they reach retirement.

There is no opt-out for employers, who will have to contribute if their employees opt in. There is concern among businesses on affordability and future pressure on wage negotiations. We recommend that the Government make an early announcement on a support package to ensure a smooth introduction. There is worrying research suggesting that some employers may try to persuade employees to opt out. This is totally unacceptable.

We have asked for more information on how the new scheme will interact with means-tested benefits since people need to be confident that they will benefit from saving. We have asked for pre-legislative scrutiny of the legislation relating to personal accounts to assess how these matters have been addressed.

The proposed reforms to the State Pension system to recognise the contribution of people with caring responsibilities received a warm welcome. The remaining proposals take a gradual approach to reform which do not go as far as some organisations wanted. We asked four questions:

  • Will they go far enough in reducing means-testing?
  • Are the arrangements to re-link the Basic State Pension to earnings right?
  • What are the implications of the proposed measures to increase the coverage of state pensions?
  • Was it right to reject alternative proposals to move more quickly to a simpler, flat-rate pension?

We welcome the recognition that growth in the extent of means-testing over time should be restricted. While the Pension Credit has lifted many pensioners out of poverty, retaining the present system as it stands would mean an unacceptable increase in the proportion of people on means-testing. The evidence we received confirmed that the proposals should reduce means-testing but there is uncertainty about the long term projections.

The Government's decision to re-link the Basic State Pension to earnings is also commendable. The White Paper does not guarantee the date when this will take place - it states that it will be 2012, or at the end of the next Parliament, subject to affordability. We questioned the Secretary of State hard on this point, as we think such equivocation is unhelpful and a firm commitment would be welcome. The additional delay beyond 2010-11 will defer the benefits of the reforms for current and future pensioners.

We welcome the Government's proposals to increase dramatically the number of women and carers who receive a full Basic State Pension. The qualifying years will reduce to 30 in April 2010 and crediting arrangements will be improved. These are important steps which will make a real impact on the retirement incomes of women and carers. We welcome them, although we have concerns about those who will miss out on the new entitlement by days or months.

The Government is retaining a State Second Pension (S2P) with different qualifying arrangements to the Basic State Pension. The gradual move to a 'flat-rate' system means that the first completely 'flat-rate' pensions will be paid to people retiring in around 2080 and, even then, those with more years of contributions and credits will get more S2P. We are concerned that gaps remain in entitlement to the State Second Pension compared to the Basic State Pension, particularly for the self-employed. We recommend that the Government set a date for re-examining the feasibility of moving to a single flat-rate state pension.

The Government has also proposed that the State Pension Age should increase in three steps - to 66 from 2024, to 67 from 2034 and to 68 from 2044. We conclude this is a justifiable step, but have concerns about the impact on poorer people and those in manual jobs. We recommend that any increase be demonstrably linked to measures to reduce health inequalities and increasing access to training and jobs for older workers.

Lastly, we discuss the importance of giving people clear financial advice and support to make the decisions they need about their financial future. We recommend that the Government issues better pensions forecasts, building on the work it has already done with Combined Pensions Forecasting. We also suggest that resources should be put into making face-to-face financial advice available locally, especially for those on low incomes.

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Prepared 22 July 2006